August 23, 2010: If the VIX was a Stock
August 23rd, 2010
Traders use the level of the VIX (CBOE Volatility Index) as a validating gauge on whether a market move is normal or extreme. According to the CBOE’s website, the VIX is a “key measure of market expectations of near-term (thirty day) volatility conveyed by S&P 500 stock index option prices.” This index is generally known as “the fear gauge”. Rising levels are considered increasingly bearish and falling levels are considered increasingly bullish as option traders’ aggregate bets are continuously assessed.
Through a mathematical calculation, the level of the VIX is intended to predict the expected percentage move of the S&P 500 over the next thirty-days. Currently, the VIX is 25.61 which says that option traders (at the moment) expect the price of the S&P 500 to move up or down by 2.61% in the next thirty days. Since the VIX is a rapid interpretation of the near-term trend based on positions already taken by option traders, that interpretation can quickly change and is somewhat of a lagging indicator.
Looking at the price trend of the VIX from a technical perspective, it appears to be suggesting higher prices (a bearish indicator for underlying S&P 500). 2010’s low came on April 12 at 15.23. This ”trough” came ten days before THE cycle high for the S&P 500. During that ten days, the index rallied 2.1% but abruptly reversed into a nine-week, 17.1% decline.
Since April’s low, the VIX set a higher low at 21.36 on August 9.
2008’s low for the VIX came on May 19 at 15.82 which was followed by a higher low on August 22 at 18.64. On May 19, the S&P 500 peaked at 1440.24; a lower high than 2008’s high (January 2 at 1471.77). From the May 19 peak in the S&P 500 (low for the VIX), the index accelerated into a ten-month, 53.7% decline.
The current rising trend for the VIX is a strong indication that option traders are beginning to position for a significant negative reversal in the S&P 500.
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August 16, 2010: Macro Reflections
August 16th, 2010
There was one bank failure last week which brought 2010’s total to 110 with a cost to the FDIC Insurance Fund of $19 Billion. At this point in 2009, there had been 77 banks seized by regulators with an Insurance Fund cost of $18.34 Billion.
Approximately fifty-days after the end of each quarter (that would be August 24), the FDIC publishes its Quarterly Banking Profile. In that very detailed report, the “problem bank” list is updated. At the end of Q1, there were 775 banks on that list, (up 10.4% from the previous quarter and up 154% from the end of Q1 2009). Assets for banks on that list were $431 Billion at the end of Q1 (up 6.9% from the previous quarter). The report can be found at .
While that is a lot of percentages and statistics and those data can be interpreted a lot of different ways, we believe that the information in the upcoming report represents yet another substantial psychological hurdle for the market to work through. So far, the assumption has been that the FDIC (and other government agencies) will continue “assisting” the financial sector with a variety of supposedly stimulative measures.
Conventional wisdom holds that Financials generally lead the broad market trends. Looking at the S&P Financials, the past five days have produced a decline of 5.45%; the worst performance of any S&P sector. Over the trailing 52 weeks, the sector is also the weakest (-0.12%) out of the major S&P sectors and the only one with a loss during that period.
Another interesting development in the sector is that money flow has been somewhat concentrated. Out of the eighty names in the index, thirty-three are above their respective 200 Day Moving Averages. Of that thirty-three, nine of the top ten names in term of margin above their Average are real-estate related names. Investors are clearly making a bet that either the general real estate market has fully recovered and no more bad news is coming or that Federal stimulus into the sector will continue for a long time to come.
Those nine names and the margin of extension above their respective 200 Day Moving Averages are: AVB +15.61%, EQR +15.36%, CBG +14.21%, PSA +12.21%, AIV +11.46%, BXP +11.26%, VNO +10.97%, SPG +10.52%, HCP +9.40%.
Any policy shift in terms of interest rates or government’s active role in capital markets could have a significantly negative impact on Financials in general and specifically the names above.
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A History of Julys
July 15th, 2010
As the broad markets are enjoying a very strong July thus far, we wanted to look at the history of July performance for the S&P 500. What we found is that July rallies are quite common but so are very sharp negative reversals.
We looked at performance from June closes to July closes, June closes to July highs, and July highs to July closes going back to 1990. Some of the findings were rather surprising and strongly argue for at least some measure of pull-back before the month is over.
· In every year of the sample (twenty years), July highs were equal to or higher than June’s close.
· Eleven of those twenty years saw July’s close below June’s close by an average of 2.57% with the largest negative reversal being 7.90% (2002)
· In six of the past fourteen years, there has been at least a 5% pull-back from July’s high to July’s close. The largest of which was 8.33% (2002)
· The average pull-back from July’s high to July close has been 2.85%.
· Average July performance for the past twenty years is +0.32%. Currently, the index is +6.25% for the month.
· July 2009’s performance was +7.41% which was the strongest July in the sample. Second strongest July was +6.80% (1997)
Based on July’s performance over the past twenty years, if the index was to match the strongest July (full month performance) in the sample, that would take the index to 1107. Further, if the index was to match the strongest move from June’s close to July’s high in the sample, that would take the index to 1117. We view those levels as key areas of resistance.
Conversely, if the index was to match the average performance for July over the past twenty years, (+0.32%), that translates into SPX 1033 (down -5.6% from its current level).
June 11, 2010: Dow 30
June 11th, 2010
· While the Dow Jones Industrial Average is often criticized for being too narrow of a market gauge to be relevant in any market analysis, it does provide a glimpse into prevailing market sentiment. And that sentiment, we believe, is acute uncertainty and lack of conviction.
· 2009 closed at 10,428.05 which was up 61.18% from the March 2009 low and up 18.8% for 2009. While that 18.8% may not seem like much, the first ten weeks of 2009 seemed like the financial world was in the process of outright collapse. If someone had said in January or February that the index would reverse and post an 18-19% gain for the year, it is doubtful if anyone would have taken that person seriously. As 2009 wrapped up, the broad market seemed to shift gears and begin to consider market risk again.
· 2010 has produced two separate periods of rallies up through 10,428 as well as two periods of declines that carried the index below 10,428. Further, the mystique around Dow 10,000 is alive and well.
· As we are closing in on the half-way point of 2010, it is noteworthy that there have been two days this year in which the index has spent a full trading day below 10,000. Sixteen days of 2010 have produced intraday dips below the 10,000 barrier.
· During April 26 to June 8, the Dow 30 declined by 13.3% which was the sharpest “correction” it has experienced since the current bull trend began in March 2009. On June 3, the index spiked up to 10,315. That rally took the index up through its 200 Day Moving Average (then at 10,299, now at 10,313) but sellers pounced as soon as the Average was breached.
· 10,331 is a 38.2% upside retracement of 2010’s range.
· We believe the current volatile consolidation below the Average and below the break-even level for 2010 suggests that sentiment leadership is in a state of transition.
· Technically, if the bull trend is to reassert itself in a sustainable fashion, the index will take out 10,331 and methodically push up through 10,508 which is a 50% upside retracement of 2010’s range. However, until that trend clearly develops, we continue to recommend an increasingly defensive/cautious approach.
We believe that likelihood of a downside resolution to the current consolidation is far greater than an upside resolution. Further, our work suggests that the index has near-term risk to the 8800-9000 area.
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